Business Valuation Divorce Lawyer & Stock Option Division Attorney

In the case of a professional practice (such as a medical, legal, dental, accounting, or financial services practice), a number of considerations need to be taken into consideration, including:

• The Income or capitalized earnings method. Under this method, a business valuation expert will look at the net income of the business and apply an industry/market factor that will take into account matters such as business stability and other factors.  The problem with this approach is that it does not take into account the personal goodwill and talents associated with the key professional (discussed below).  The result is that this valuation results in a somewhat artificial value of many professional practices, such that they really have little value if the professional leaves.
• A market-based valuation (how much the business could be sold for). This method can vary widely depending upon factors such as whether the patients or clients of the practice will likely continue with the business if the business becomes owned by someone else.
• Asset-based valuation. This approach takes into account the amount that could be obtained in a sale of the assets.  In most professional practices, the business assets tend to be worth little – often such as used office equipment and furniture.  This method usually results in the lowest value.

Because of the wide variations in valuation that can result in different valuation models, it is important that an attorney fight aggressively to see that the model that is the most advantageous for a client be used. It is also critical with professional practices to determine the amount and type of goodwill associated with a professional practice.

Is Goodwill Considered in the Valuation of a Professional Practice?

Yes.  There are two types of goodwill: entity goodwill and personal goodwill.  Entity goodwill may be considered in the valuation of a professional practice; personal goodwill is not considered.

Entity goodwill is the portion of goodwill that attaches to a business independent of the goodwill attached to the professional service provider.

Entity goodwill may consist of matters such as:

• The value in the name recognition of the practice by potential clients or patients,
• The location of the practice,
• Other goodwill associated with the practice itself, such as the goodwill built by staff being very attentive.

As an example, the “XYZ Injury Firm” may have developed significant goodwill over time in the community such that many people will turn to the XYZ law firm if they are injured, regardless of whether Attorney X is at the firm.  If the XYZ Injury Firm is sold, it can be expected that people will continue to use this firm based upon the past goodwill that has been developed under the firm name.

Personal goodwill is associated with the professional service provider, such as a physician.  In many instances, patients will only want to see a specific doctor, and if the doctor leaves that practice, they will follow the doctor to the doctor’s new practice, or they will look elsewhere for a new doctor.

Personal goodwill is not considered in the valuation of a professional practice.

Not necessarily! In many (perhaps most) cases, it will be in the best interests of a business to continue.  If this is the case, a determination must be made as to how the business assets are to be divided.

In most cases, one spouse will be much more involved in the business than the other spouse, particular in the case of a professional service business (such as a medical practice, where only one spouse may be a doctor).  If the parties can decide who will continue with the business, the issue becomes how to pay the spouse who will not continue with the business for his or her fair share. Sometimes there can be sufficient marital assets to make this allocation (one spouse gets the house, the other spouse gets the business). In other cases, the spouse getting the business will pay the other spouse over time.

Depending upon whether we represent the business-owner spouse or the non-owning spouse, there are many important considerations that go into developing these settlements, such as issues like obtaining security for the payments to be made and developing consequences as to what should happen if payments are missed. In a structured settlement, we will work diligently in negotiations to protect the interest of clients.

In many situations, one spouse may be the professional behind a business, while the other spouse is engaged in other matters (often raising the couple’s children).  In these cases, especially if the marriage has been fairly long, the professional spouse may be required to pay maintenance (alimony) to the other spouse, or to pay the other spouse for their share of the business.  When this is the situation, it will be in the interest of both spouses for the professional spouse to continue the practice – so that person will be able to make the required payments to the other spouse.

Under the Illinois Marriage and Dissolution of Marriage Act (IMDMA), stock options and restricted stock granted to either spouse during a marriage, whether vested or nonvested, are presumed to be marital property.[1] Consequently, they may also be divisible in a divorce.

Stock options can significantly increase in value over time. As such, ensuring that such assets are properly allocated during a divorce is critical.  As an experienced Rockford divorce lawyer with decades of experience, I represent both financially dependent and independent clients, tenaciously fighting for fair and favorable stock allocations.

[1] 750 ILCS 5/503(b)(3)